Temporary working capital

Where is debt collection going in India? Towards less muscle and more artificial intelligence

You can test this hypothesis in a very unlikely place to deploy new technology: the Indian countryside. The setting may not be as strange as it sounds, with around 5% to 10% of farmers across the country failing to repay their tractor loans on time. Explanations for the delay range from crop failures to medical emergencies and strategic flaws in anticipation of state-mandated debt forgiveness, a regular feature of political economy.

But delinquency often stems from more banal reasons: borrowers forget their due dates or do not withdraw cash to pay the non-bank financiers who provide the bulk of the loans for the purchase of agricultural equipment.

As in most emerging markets, these last mile hurdles present a frustratingly complex challenge to India’s creditors. They also increase the overall risk premium for rural advances.

Lately, three things have changed. First, the world’s cheapest data prices have made smartphones ubiquitous. Second, strong pressure for financial inclusion has seen over 400 million simple savings accounts opened in the past seven years. Finally, banks now have a nationwide mobile payment network that is fast, convenient, and supports apps like Google Pay and PhonePe from Walmart Inc. Google even recommended the architecture to the Federal Reserve. American.

Yet despite all the help of technology, collections are still difficult in villages due to ingrained language, education and money use barriers. Farmers just don’t know how to use the new digital tools. Or they may miss a deadline due to a temporary cash flow mismatch. When creditors respond by turning borrowers over to third-party debt collectors, scandals arise. It is a universal problem. In Indonesia, the 2011 death of a small, cash-strapped businessman in Jakarta after allegations of harassment by collectors led to a two-year ban for Citigroup Inc. from acquiring new card customers. credit in the country. Even when things don’t go to such extremes, unpleasant and bitter relationships usually follow.

“The best way for a bank or financial institution to lose a customer is to give the account to a collection agency,” says Sumeet Srivastava, managing director of a five-year-old startup that aims to boost collections without human contact. “You can make collections without collectors.”

Prior to founding Mumbai-based Spocto Solutions, Srivastava worked at General Electric Co. and Monsanto Co., the seeds and agrochemicals giant later acquired by Bayer AG. Its Kisan Pay – Hindi for Farmer Pay – is not an app, but an automated voice call, which allows farmers to choose when and how they can repay their loans. The selections trigger text messages with online payment links. The bot remains on call to help borrowers navigate the unknown world of online money transfers.

It sounds simple enough, until you consider that in a large multilingual country like India, with over 146 million operational land properties, the service must be offered in over 100 dialects. Spocto works on 1.2 trillion rupees ($ 16 billion) in loan portfolios spread among some of India’s largest banks and non-bank financiers. Its recovery rate in cases where borrowers have missed a payment is 85%, compared to 70% for traditional channels. The cost savings for creditors are in the range of 30% to 40%, Srivastava says.

The value for lenders comes from behavioral clues that Spocto collects by encouraging customers to pay on time. By training its algorithms to extract the data, Srivastava is able to predict which customers will likely start paying again after missing a few installments, and which will likely default. Transferring a much smaller set of problematic loans to collection agencies means that good clients aren’t turned off by powerful tactics. For creditors, bad debt ratios and provisions for losses decline; profitability improves.

From remittances and working capital financing to microinsurance and buy now, pay later, fintech is disrupting mainstream finance. However, collection technology has received much less attention and investment. Expect this to change, as big data analysis of reimbursement issues and quirks complements the yes / no decisions of underwriting algorithms. The two can even be combined – to filter out the right customers and retain them.

Ten years ago, there were almost 10,000 collection companies in the United States. Today, their number has dropped below 7,000. Over 70% have fewer than five employees, and it is these small agencies that are regrouping. “While letters and phone calls are still the most common in the industry, text messages, artificial intelligence-based chatbots and other automated tools have been adopted by large companies,” TransUnion said in its 2020 collections report. The credit reporting institution’s survey shows 9% of industry participants expect software investments to be a significant expense over the next two years.

This is what attracts the husband-wife team of Sumeet and Puja Srivastava to test the waters with credit card and other unsecured debt on the east coast of the United States. Back in India, Srivastava plans to put his money there where is he. He wants to finance overdue deadlines where Spocto’s analysis shows that delinquency is likely to be temporary. Taking the risk of the balance sheet can be a jump for a seeded startup, so that Srivastava could partner with a bank. But it tells you where debt collection is headed – to less muscle and more intelligence. Of the artificial kind.

Andy Mukherjee is a Bloomberg opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for The Straits Times, ET NOW and Bloomberg News.

This story was posted from an agency feed with no text editing. Only the title has been changed.

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